“We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes, while the losers make big mistakes.”
-Ned Davis

“More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.”
-Ray Dalio

“Its okay to be wrong; it is not okay to stay wrong”
-Old Traders Expression

 

On Friday mornings, I like to wax philosophical about recent events. There are often instructive lessons to be learned, if only we pay attention to what others are doing correctly — and incorrectly — in the world of investing and trading. I take every opportunity that presents itself to let someone else pay for my tuition in the school of life.

This has been a week of blunders. Whether it is research, trading, market calls, or economics, we have seen some pretty awful judgment exercised.

When it comes to investing mistakes, I like to use a simple, 3 step process* to avoid big mistakes and to keep errors manageable.

Rule #1: Expect to be wrong.

Rule #2: Admit Error

Rule #3: Repair

The first step is simple attitude shift that is designed to remove your ego from the error recognition and repair process.

We know that the best stock pickers in the world are wrong about half the time; we also have learned that four fifths of active fund managers under perform their benchmarks. Almost no economists consistently forecast future GDP, Employment, Interest Rates, etc. — indeed, nearly all get it wrong when they look out more than month or so.

If you recognize the statistical certainty that you will be wrong, it should be much easier to accept any error as a normal part of your life.

When people refuse to admit error, it is because their sense of self-worth is too tied up in their calls. Once the expectation of error becomes built in, you remove the ego altogether.

Admitting error should be part of your regular process. I have found two ways to do this that seem to get good results: 1) Identify the error in a professional capacity to relevant parties. This can be to you, your co-workers and colleagues. 2) Perform regular reviews of your errors with the hope of avoiding them in the future. I do this with my annual mea culpas; Ray Dalio’s Bridgewater hedge fund is notorious for their brutal self-examinations — and they are (arguably) the most successful hedge fund in the world.

What does NOT admitting error look like? It is Apple investors, who double up all the whole way down from $700 to $400. It is the radical financial deregulators like Edward Pinto & Peter Wallison blaming the financial crisis on unrelated bank loans to poor minorities. It is the cacophony of excuses from the Gold community, blaming the 30% drop on central banks, Goldman Sachs, “paper” gold, the shorts and the dollar. My friend Albert Edward’s reiterated call for S&P500 at 450 — with the SPX kissing 1600 — smacks of a classic non-admission of error. His preference is to go down with the ship.

This week’s mother of all refusals to admit mistake has to be Harvard professors Reinhart & Rogoff. Instead of clearly and honestly issuing a mea culpa, they half admitted error, then back-peddled in a stunningly dishonest OpEd in the NYT today. We still don’t know what the real drop-dead line is for debt because they refuse to admit the mistake and try again (please consider peer reviewed publication next time).

Refusal to admit error prevents you from reaching the third step: Repair. If you do not admit the error, how can you fix it? In academia, this affects your reputation. In trading, your P&L is worse off, and in investing, your long-term returns suffer.

What mistakes did you make this week? What have you done about it?

 

Previously:
Expect to Be Wrong in the Stock Market (April 5, 2005)

My Annual Mea Culpas: 2012, 2011, 2010, 2009

Ray Dalio & the Machinery of Finance (September 15th, 2011)

 

__________

* If we want to be clever, we can add a fourth step — analyze how and why the error occurred, and consider ways to systemically prevent these in the future. That is a long term business management issue, and is itself worthy of a full post.

Category: Apprenticed Investor, Psychology, Rules, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “The Fine Art of Being Worng Wrong”

  1. AgatsuMike says:

    What did I make a mistake about last week? I did not scale in and increase my size in my BIDU preearnings run-up play.

    What have I done about it? Reviewed my scale-in philosophy and strategy after coincidentally reading an article on reading the tape ( I had been putting off) that wound up addressing scaling in tactics. Also, check in with my emotions and risk threshold, relative to my own present situation in terms of uncertainty and fear.

    On a larger Life Review context. I was just mulling over (lots of therapy, too) what might be key simple steps pertinent to life experience, learning, adaptation and resilience. Those Steps/Stages being:

    1. Remember
    2. Let Go
    3. Refocus — on to something else, something more helpful and productive, something more in line with intention/purpose/goal

  2. alexanderdelarge says:

    This post ‘ fine art of being wrong ‘ and this one….* http://www.ritholtz.com/blog/2013/04/contextualizing-retracements-by-time-frame/ are ( is ? ) what keeps me coming back.
    Tremendous learning opptys. Thanks BR.
    * of course there are others, these are recent ex’s

  3. Barbara Kearney (@kearbar) alliteratively rephrases this as “Acknowledge, Apologize, Amend”

  4. faulkner says:

    The ability to readily admit error is an advanced thinking skill. As you note, it requires “the statistical certainty that you will be wrong” to justify the meta conclusion that it is right to be wrong. This is difficult for an individual to achieve on his or her own. It is somewhat easier to maintain if it is in your community’s culture – as you describe of Ray Dalio’s Bridgewater and your own Fusion IQ. The culture rewards error finding and repair. For the individual trader and investor this would mean thinking quite differently about why you would meet up with others in the industry and what those “bull” sessions would be about.

  5. [...] 99 “Its okay to be wrong; it is not okay to stay wrong” The Fine Art of Being Worng Wrong | The Big Picture [...]

  6. [...] maybe they did send an informal note and this is all just R&R framing, for all I know. And Barry Ritholtz makes a fine point that you should click through to read: When people refuse to admit error, it is [...]

  7. constantnormal says:

    I tend to take a long time to decide on things, and after I have decided that a mistake was made, there is an interval of deciding what do do about it … Was it a mistake in timing? Selection? Did I get the facts wrong? Or is my perception of the market/economic backdrop way out in left field? What is the laikely progression from this point forward? What is the best course to follow in correcting this error?

    This ruminating allows degrading situations to further degrade, but I have learned that, for me, instantly reacting leads to greater losses, due to reacting in another wrong direction (there are almost always, multiple paths to proceed along, very few investments represent binary situations in my eyes). This is why I am not a trader.

    There are some errors that I correct instantly … if a company has lied to stockholders, or acted to deceive them, I sell all shares instantly, regardless of gains, losses or anything else. Then they go on my do-not-look-at list …

  8. gman says:

    Perfect timing on this post..Ken Langone hosting on Bloomberg…repeating every zombie idea that has been debunked over the past 7 years.

  9. [...] The fine art of being wrong.  (Big Picture) [...]

  10. Bob Loblaw says:

    Just last night I said to my partner:

    “Life is one big, ongoing lesson. Either learn, or get accustomed to making the same mistakes.”

  11. secular bear says:

    Being Wrong: Adventures in the Margin of Error by Kathryn Schulz – great book about how to be wrong, the difficulty in dealing with it and how different people react when they find out they are wrong (if they are even willing to admit that to themselves).
    http://www.amazon.com/dp/0061176052

  12. [...] How To Admit An Error (And How Not To) (Barry Ritholz) [...]

  13. [...] The fine art of being wrong – The Big Picture [...]

  14. [...] reads from Ritholtz and Detrick on what all great market speculators do: make [...]

  15. [...] is a link to Barry Ritholtz recent article on how to be wrong and move on. He applies it to trading, but the same philosophy could be used at [...]

  16. [...] source:ritholtz.com [...]